Monday, May 30, 2016

Short-term Targets Meet, Now What?

Last week, I mentioned that options week volatility looked like accumulation and that I expected higher prices ahead. Now, I am beginning to feel that the "bots" are front-running my trades. Two weeks ago I gave a weekly target of SPX 2070/80 and it was met on Monday, and last week my targets of SPX 2085 by the first week of June and 2100 by mid-June were both taken out. As I will show this week, the rapid advance has been at the cost of capitulation by the bears, so that a top may be only a couple weeks away. Just remember that a top does not mean an immediate crash, as the May 2015 top did not see a significant decline until late August.Let's start with the intermediate-term Indicator Scoreboard of the weighted avg of 16 indicators. The overall pattern appears similar to the early 2015 period where an initial "SELL" was met by a decline that included a sharp rise in bearishness then a sharp rally that caused bearishness to again fall sharply (Feb-Mar). If the similarities continue we could see a topping period (distribution) extend another 4 or 5 months.

In April, I pointed out that even though the Students Trifecta had given a sell signal at SPX 2080 an immediate decline was unlikey "Why I am a Cautious Bear" due to too much volatility hedging. This week I want to revisit the volatility measures starting with the intermediate signal of the VXX $ Volume. After generating a "BUY" at the Jan and Feb lows, the indicator remained neutral for the second half of the rally, then moved into the bottom half of the range near the April high and has remained there. When this indicator was below the mean over most of 2015, no significant breakouts were seen, so it is doubtful if we see one now.

The longer-term VXX/XIV ratio was at a "BUY" as late as early April, but has fallen quite dramatically since and the current position is close to the position of the May and Nov 2015 tops.

Conclusion. As late as last week, I indicated that I was expecting a "summer swoon" with an SPX decline down to the mid-1700s possibly due to election (Trump factor) jitters. More recently I have come up with a second scenario which I slightly favor although still rate as 50/50. The second scenario is that of a "hunchback" head and shoulder pattern from early 2015 with a long left shoulder the first half of 2015 and a slightly lower head (DJIA, SPX but not NDX) defined by the Aug 2015 and Jan 2016 declines. This may be determined by election outcomes with a Trump victory seen as short term pain and long term gain whereas a Clinton victory would be short term gain and long term pain.Weekly trade alert. None at this time. Too early to short and going long at this time is like picking up quarters in front of a steamroller.